GASB 67 and 68 and PERAs Schedule of

GASB 67 and 68 and PERA’s Schedule of Employer Allocations New Mexico Association of Government Accountants PDT 2016 Natalie Cordova, CFO March 17, 2016

Agenda GASB 67 – NM PERA • Refresher of standard • Recap of FY 14 • Lessons learned • GASB 67 Changes • FY 15 results • Comparison of ‘ 14 to ‘ 15 amounts Schedule of Employer Allocations • Changes to the Schedule in FY 2015 Slide 2

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GASB’s Change to Pension Accounting • GASB changes under statements 67 and 68 are intended to promote consistency and transparency of employer reporting. • Approach based on GASB’s decision that reporting the Net Pension Liability (NPL) on the face of a government’s financial statements allows users of the financial statements to better assess: • The long-term benefit obligations of a governmental entity; • The general long-term financial health of a governmental entity; • How well a governmental entity has supported and maintained the pension promises made to their employees. Slide 4

GASB Change to Pension Accounting Underlying Principals • Pensions are part of the exchange between employees and employers • • • Pension plans are part of total compensation Employer incurs a pension obligation as a result of the “employment exchange” Cost (expense) should be recognized in the period services are provided • The pension plan is primarily responsible for paying pension benefits to the extent the plan has sufficient assets • The employer is primarily responsible for paying benefits to the extent the plan does not have sufficient assets Slide 5

GASB Change to Pension Accounting Summary of Changes • Separate accounting and funding • Net Pension Liability (NPL) moves to balance sheet of employers. NPL is: • • Actuarially accrued liability (referred to in statements as Total Pension Liability (TPL) base on Entry Age Normal funding method, less Plan’s Fiduciary Net Position (market value of assets). • Annual pension expense or pension income with no direct relationship to actuarially determined contributions. • Deferred Inflows and Outflows created. Slide 6

GASB 67 – Total Pension Liability Calculation Total Pension Liability (TPL) • Three essential steps for measurement: • Project total future pension current and former employees • • Based on terms of the plan Actuary assumptions, such as how long the employees are expected to work for participating government, what salaries are expected to be, period of collection of benefits after retirement. • Discount the projected benefit payments to their value at the time of the measurement (present value) • Attribute the present value of projected payments to the periods when they were or will be earned – past and future • Actuary provides a GASB 67 supplemental report that is separate from the actuarial valuations used for funding decisions. Slide 7

GASB 67 – Net Pension Liability Calculation Net Pension Liability (NPL) • To the extent that the cumulative long-term obligations to provide pension benefits of the participating governments in a cost-sharing plan (TPL) is larger than the value of the assets available in the pension plan’s trust to pay pension benefits. TPL - FNP = NPL UAAL FY 2014 $17. 7 Billion - $14. 4 Billion = $3. 3 Billion $4. 3 Billion FY 2015 $18. 5 Billion - $14. 2 Billion = $4. 2 Billion $4. 7 Billion PERA multi-employer cost sharing fund example Slide 8

GASB 67 – Total Pension Liability Calculation Net Pension Liability vs: Unfunded Actuarial Accrued Liability (UAAL) • Market value of assets (Fiduciary Net Position) is greater that actuarial value of assets used in the June 30, 2014 and June 30, 2015 actuarial valuations. • 4 year smoothing (UAAL) vs. Fair Market Value (GASB/NPL) • Net Pension Liability of PERA divisions/funds are less than the UAAL in the June 30, 2014 actuarial valuation with the exception of the Magistrate’s Fund. • Magistrates Fund is only PERA plan which is projected to become insolvent using GASB 67 projection method. This results in the required use of lower discount rate in measuring the Fund’s liability resulting in an increase in the NPL under GASB. Slide 9

GASB 67 • Census Data • • Importance of Census Data • • Demographics such as birth date (member and spouse), gender, wage info, etc. Data used by actuaries to calculate the Total Pension Liability and UAAL • Accurate census data from employers is vital PERA’s external and internal auditors perform test work on census data (annually) • • Select sample at PERA Test at employer level • Request HR/Payroll records, etc. , to verify and confirm data at plan level Slide 10

GASB 67 • The need for a “Schedule of Employer Allocations” • Why? • GAAP financial statements of the plan will not provide sufficient appropriate audit evidence for the governmental employer auditor. • • Potential for opinion modifications PERA’s “Schedule of Employer Allocations” • Specific elements – all by employer (“org code” specific) • Share of NPL • Share of Deferred Inflows/Outflows • Share of Pension Expense • Sensitivity Rate Disclosure Slide 11

Financial Statements – Notes FY 2014 Required GASB 67 Note Disclosure (NPL of Plan Membership) • The components of the net pension liability of the plan’s membership at June 30, 2014 by Fund: Judicial PERA Total Pension Liability (TPL) Plan’s Fiduciary Net Position (FNP) Net Pension Liability (NPL) Ratio of Fiduciary Net Position to Total Pension Liability (TPL) $17. 7 Billion 14. 4 Billion 3. 3 Billion Magistrate Total Pension Liability (TPL) Plan’s Fiduciary Net Position (FNP) 91 Million Net Pension Liability (NPL) 41 Million Ratio of Fiduciary Net Position to Total Pension Liability 81. 31% 68. 81% Volunteer Firefighter Total Pension Liability $56 Million Plan’s Fiduciary Net Position (FNP) 35 Million Plan’s Fiduciary Net Position Net Pension Liability (NPL) 21 Million Net Pension Liability Ratio of Fiduciary Net Position to Total Pension Liability $132 Million Ratio of Fiduciary Net Position to Total Pension Liability 62. 38% Actuarial assumptions—The total pension liability, net pension liability, and certain sensitivity information are based on an actuarial valuation performed as of June 30, 2013. The total pension liability was rolled-forward from the valuation date to the plan year ending June 30, 2014. Slide 12 $40 Million 61 Million (21 Million) 150. 47%

Financial Statements – Notes FY 2014 Required GASB 67 Note Disclosure (Sensitivity of NPL to discount rate): • Discount rate. The discount rate used to measure the total pension liability was 7. 75 percent. The projection of cash flows used to determine the discount rate assumed that future contributions will be made in accordance with statutory rates. On this basis, the pension plan’s fiduciary net position together with the expected future contributions are sufficient to provide all projected future benefit payments of current plan members as determined in accordance with GASB Statement No. 67. Therefore, the 7. 75% assumed long-term expected rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. Sensitivity of the Net Pension Liability (NPL) to changes in the discount rate: • The following presents the net pension liability of PERA (fund), calculated using the discount rate of 7. 75 percent, as well as what PERA’s (fund) net pension liability would be if it were calculated using a discount rate that is 1 -percentage-point lower (6. 75 percent) or 1 -percentage-point higher (8. 75 percent) than the current rate: PERA Net Pension Liability 1% Decrease (6. 75%) $5. 5 Billion Current Discount Rate (7. 75%) 1% Increase (8. 75%) Slide 13 $3. 3 Billion $1. 6 Billion

Financial Statements – Required Supplementary Information FY 2014 RSI (Schedule of Changes in Net Pension Liability) PERA Fund only Slide 14

GASB 67/68 – Lessons learned from FY 2014 • Employer paid member benefits • Additional pension expense to employers • Approximately $50 M in Municipal General • Approximately $15 M in Municipal Police • Approximately $10 M in Municipal Fire Slide 15

GASB 67/68 – Lessons learned FY 2014 • “Hidden Entities” • More work for employer • Allocate amounts for use in separate entity financial amounts • Other than June 30 year ends • Use of the schedule and information • Alternatives Slide 16

GASB 67 – Exposure Draft Changes Background A 1. Statements 67 and 68, approved in June 2012, establish accounting and financial reporting requirements for pension plans that are administered through trusts that meet the criteria specified in paragraph 3 of Statement 67 and pensions provided to the employees of state or local governmental employers through such plans, respectively. The requirements of Statement 67 became effective for fiscal years beginning after June 15, 2013, and the requirements of Statement 68 became effective for fiscal years beginning after June 15, 2014. Statement 73, in part, establishes accounting and financial reporting requirements for pensions that are not within the scope of Statement 68. Those provisions are effective for fiscal years beginning after June 15, 2016. A 2. After the issuance of those Statements, issues were raised by stakeholders including (a) presentation of payroll-related measures in required supplementary information, (b) selection of assumptions and deviations from the guidance in Actuarial Standards of Practice for financial reporting purposes, and (c) classification of payments made by employers to satisfy employee (plan member) contribution requirements. In July 2015, the Board added a project to its current technical agenda to address those issues. Deliberations began in September 2015. In addition, feedback on project issues was provided by members of the Governmental Accounting Standards Advisory Council at its November 2015 meeting. Slide 17

GASB 67 – Exposure Draft Changes Presentation of Payroll-Related Measures in Required Supplementary Information 5. For single-employer and cost-sharing pension plans that are administered through trusts that meet the criteria in paragraph 3 of Statement 67, the measure of payroll that is required by paragraph 32 of Statement 67 to be presented in schedules of required supplementary information (and used in ratios that are presented in required supplementary information) should be covered payroll. Covered payroll is the portion of compensation paid to active employees on which contributions to a pension plan are based. 6. For employers that provide pensions through pension plans that are administered through trusts that meet the criteria in paragraph 4 of Statement 68, the measure of payroll that is required by paragraphs 46 and 81 of Statement 68 to be presented in schedules of required supplementary information (and used in ratios that are presented in required supplementary information) should be covered payroll. Slide 18

GASB 67 – Exposure Draft Changes Selection of Assumptions 7. For purposes of the selection of assumptions used in determining the total pension liability, a deviation, as the term is used in Actuarial Standards of Practice issued by the Actuarial Standards Board, from the guidance in an Actuarial Standard of Practice should not be considered to be in conformity with the requirements of Statement 67, Statement 68, or Statement 73. Slide 19

GASB 67 – Exposure Draft Changes Classification of Employer-Paid Member Contributions 8. In some circumstances, payments are made by the employer to satisfy contribution requirements that are identified by the pension plan terms as plan member contribution requirements. For purposes of applying Statement 67, those amounts should be classified as plan member contributions. For purposes of applying Statement 68, those amounts should be classified as employee contributions, including for purposes of determining a cost-sharing employer’s proportion. An employer’s expense and expenditures for those amounts should be included in salaries and wages of the period for which the contribution is assessed. If an employer makes payments to satisfy employee contribution requirements (for example, if an employer “picks up” employee contributions in connection with an election made for tax reporting purposes), the employer should disclose information about that arrangement. Slide 20

GASB 67 – Exposure Draft Changes Basis for Conclusions Classification of Employer-Paid Member Contributions B 5. During the implementation of Statements 67 and 68, stakeholders raised concerns about the requirements of those Statements regarding the treatment of payments made by employers to satisfy employee contribution requirements—that is, the requirement that those payments be classified as employee contributions if they are recognized by the employer as salary expense; otherwise, those payments should be classified as employer contributions. With respect to Statement 68, concerns focused on whether those payments should be classified as employee or employer contributions for purposes of determining a cost-sharing employer’s proportion and proportionate share of the collective net pension liability. With respect to pension plan reporting under Statement 67, stakeholder concerns focused on challenges in obtaining information about whether the employer is including the amount in salary expense. Slide 21

GASB 67 – Exposure Draft Changes Basis for Conclusions - Continued Classification of Employer-Paid Member Contributions B 6. With respect to the concerns expressed about Statement 68, the Board considered the characteristics of payments made by employers to satisfy contribution requirements that are identified by the pension plan terms as employee (plan member) contribution requirements and concluded that those payments retain the characteristics of employee contributions. Consistent with the manner in which employee contributions are viewed for purposes of other aspects of measurement under the requirements of Statements 67 and 68, the Board concluded that for this purpose, employee contributions should be viewed, first, as associated with current-period service cost. Based on that view, the Board further concluded that a cost-sharing employer that “picks up” employee contributions should not report a higher proportion of the collective net pension liability relative to other employers in the pension plan because those amounts, which are intended to satisfy employee contribution requirements, are related to current-period service cost (rather than past service cost). Consistent with the conclusion that the amounts retain the characteristics of employee contributions, the Board also decided to require that the employer’s expense and expenditures associated with those amounts be included in salaries and wages. The Board also concluded that, if there arrangements under which an employer makes payments to satisfy employee contribution requirements, information should be disclosed about those arrangements. The Board believes that this information is essential to understanding the compensation expense reported by employers. Slide 22

GASB 67 – Exposure Draft Changes Basis for Conclusions - Continued Classification of Employer-Paid Member Contributions B 7. With respect to the concerns expressed about Statement 67, the Board believes that classifying employerpaid member contributions in the same manner for both plan and employer reporting purposes enhances consistency and understandability. Additionally, the Board notes the practical concerns associated with a pension plan’s classification of those contributions being dependent upon the employer’s expense classification of those amounts. Therefore, the Board concluded that pension plans should report contributions consistent with their designation pursuant to pension plan terms. Slide 23

GASB 67 – FY 2015 Results for FY 2015 in PERA’s Financial Statements • • • MD&A – high level overview of NPL pages 7 -8 Notes – Note 12 pages 72 -80 RSI pages 84 -96 • PERA Fund in FY 2015 MD&A Slide 24

GASB 67 – FY 2015 Results for FY 2015 in PERA’s Financial Statements • Judicial Fund in FY 2015 MD&A Slide 25

GASB 67 – FY 2015 Results for FY 2015 in PERA’s Financial Statements • Magistrate Fund in FY 2015 MD&A Slide 26

GASB 67 – FY 2015 Results for FY 2015 in PERA’s Financial Statements • Volunteer Firefighter Fund in FY 2015 MD&A Slide 27

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GASB 67 – FY 2015 RSI Slide 36

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Schedule of Employer Allocations FY 2015 New Mexico PERA Cost Sharing Plan Municipal General Division Schedule of Employer Allocations 6/30/2015 Employer Code Employer XXXX County XXXX City XXXX Special District Total Contributions 2014 Actual Employer Contributions $ 739, 604 2014 Employer Allocation Percentage 2015 Actual Employer Contributions 2015 Employer Allocation Percentage Change in share of BOY NPL 0. 9957% $ 762, 984 0. 9651% (238, 713) 14, 418, 788 19. 4121% 15, 232, 749 19. 2677% (1, 126, 475) 35, 952 0. 0455% 16, 382 33, 200 0. 0434% $74, 000 100% Note: The three examples do not represent the total population of employers, as such, amounts are not intended to total 100% Slide 43 $79, 000 100%

Schedule of Employer Allocations FY 2015 Notes to the Schedule • Plan Description • Summary of Significant Accounting Policies • Contributions (time range, estimates, other info) • Plan/division specifics • Relationship to PERA’s FY 2015 Financial Statements • PERA multiemployer cost sharing fund focus • Divisional Schedules • Pension Expense Slide 44